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Screw FICO: How social underwriting could expand access to credit

By Fast Company



With Kiva Zip, Kiva is growing its U.S. operations to provide loans to entrepreneurs who can’t get money from banks.

Financial institutions normally decide loan eligibility based on factors like your credit score, cash flow, and the amount of collateral you have. On Kiva Zip—the micro-lender’s platform for U.S. entrepreneurs—it’s different. What matters is whether you’re trusted by the community, whether you’re willing to “pay it forward,” and whether you’re prepared to do some fundraising yourself.

Kiva calls its process “social underwriting,” and indeed it’s less impersonal than the data-driven approach taken by mainstream lenders. The aim is to find entrepreneurs who are worthy of help, but don’t necessarily meet the standard criteria. In other words, lots and lots of people out there. Fourteen percent of all small business owners say they’ve been rejected for a loan, including 23% of Asian owners, 20% of black owners and 19% of Hispanic owners, according to a recent poll from Gallup and Wells Fargo.

“We’re trying to underwrite people based on their character and their standing in the community,” says Jonny Price, senior director of Kiva Zip. “It allows us to lend to people who don’t have good FICO scores.” (FICO is the most common kind of credit score.)

Since launching the site in beta in 2011, Kiva Zip has issued 1,800 loans to small businesses at up to $10,000 a time. More than 62,000 individuals have loaned interest-free money through the crowd-lending platform, in $25 increments.

Founded in 2005, Kiva made its name issuing loans in East Africa, but today sees a strong future in the U.S., filling in a hole left by more mainstream financial providers. It recently launched Kiva Zip in San Francisco, its home town, with further launches planned for New York and Oakland. It plans to have a dedicated employee in each city to help entrepreneurs through the process.

Kiva’s social underwriting has several components. First, entrepreneurs can be endorsed via Kiva’s trustee network of 600 nonprofits and agencies around the country. Second, they need three references from other businesses. Third, they have to find lenders on Kiva’s 1.3 million-strong network who are willing to back them. Fourth, they need to issue one $25 loan themselves. And, lastly, they’re asked to bring in at least 15 friends or family-members during a private fundraising period.

“We’re trying to get at their character: ‘do you get the mission, are you willing to pay it forward, rather than just take take take,” says Price, talking of the need to pay one loan to another business.

The private period tool is particularly effective. Among businesses that invite 20 or more people onto Kiva, the repayment rate is 95%-plus; more than 15 people, the rate’s more than 87%. And Kiva doesn’t have to do much by way of due diligence to see that, though it does do some pre-vetting to check against fraud and over-indebtedness.

“It’s a very cheap way to underwrite loans,” Price says. “You can imagine what it takes for a lender to get two years of cash flow statements from small business owners. It’s really cumbersome for the owner, and it’s time-consuming for the loan officer to go through that and dig into every inconsistency. Our guys just say ‘go get 15 or 20 people to lend to you.'”

And it’s also a clever way for Kiva to expand its own reach. Every time entrepreneurs invite in their contacts, it expands the pool of lenders and the people who might “democratically participate in the economic development of their community.”

Though it’s too early to say whether social underwriting will work on a larger scale, so far it shows potential to expand access to credit at a time when that’s badly needed. Since the recession, banks have been dialing back their small business programs, fearing additional risk. Kiva Zip is the antithesis to that. It welcomes in more people as a way of mitigating risk; in traditional lending, you normally exclude people to get the loan repayment rate up.

This article was originally published by Fast Company.

Photo: David Stanley 

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